Ecuador: Employee Incentives

The In-House Lawyer Logo

This country-specific Q&A provides an overview to tax laws and regulations that may occur in Ecuador.

This Q&A is part of the global guide to Employee Incentives. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/employee-incentives/

  1. What kinds of incentive plan are most commonly offered and to whom?

    Ecuadorian legislation is protectionist when it comes to workers, offering them important benefits and guarantees. This has not been an impediment, however, for corporations to implement their own incentives plans, which are agreed upon with their employees. These voluntary incentives can be defined as follows:

    - Cash-based: Different bonuses granted based on the criteria of meeting objectives, reaping results in the short or medium term, share option plans, and so on.

    - Non-cash-based: Cars, subsidies, club memberships, training, extended days of maternity and breastfeeding leaves, short work schedules and so forth.

    There are no restrictions on employees in terms of their access to incentive plans or on companies wishing to offer them. Voluntary incentive plans may be proposed to employees, managers, expatriates, legal representatives, etc.

  2. What kinds of share option plan can be offered?

    Share option plans can be offered with regard to shares in the local company where the employee works and/or shares in the parent or a subsidiary company. Generally, there is no restriction for employees to access shares in a company.

  3. What kinds of share acquisition/share purchase plan can be offered?

    In Ecuador, shares can be transferred without restriction. The Ecuadorian labor law does not establish a special procedure for this purpose. Share assignments are regulated by a special law that does not make any distinction in terms of a worker’s performance on the job or his or her employment relationship with the company in which the shares will be assigned.

  4. What other forms of long-term incentives (including cash plans) can be offered?

    - Cash-based plans can consist of gradual salary increases during the worker’s time of service with the company.

    - A worker’s performance or contribution to accomplishing the company’s annual goals could be a factor for a bonus.

    - Any other mutually agreed criteria or criteria offered by the company for receiving incentives (i.e. study plans financed or payed by the company).

  5. Are there any limits on who can participate in an incentive plan and the extent to which they can participate?

    There is no distinction or limits for applying or participating in incentives. According to Ecuadorian jurisdiction, however, cash payments made regularly to workers could be presumed to be a permanent employment benefit; for example, if an employee receives a bonus in the same amount for several successive months, then in the case of any dismissal dispute, the authorities would take the worker’s salary, plus payment of cash-based incentives made on a regular basis, into account when calculating severance pay.

  6. Can awards be made subject to performance criteria, vesting schedules and forfeiture?

    Yes, however, if granted on a regular basis, awards could be deemed to be a worker’s permanent right, in accordance with legislation. Therefore, it is important to understand the local legal system to know the potential consequences of granting and eliminating incentives, especially when they are cash-based.

  7. What are the tax and social security consequences for participants in an incentive plan including: (i) on grant; (ii) on vesting; (iii) on exercise; (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

    (i) on grant;

    Tax: When a cost is generated for the company and an income for the employee, a tax effect is generated (deduction for the company and income tax for the worker).

    Social Security: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

    (ii) on vesting:

    Tax: When a cost is generated for the company and an income for the employee, a tax effect is generated (deduction for the company and income tax for the worker).

    Social Security: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

    (iii) on exercise;

    Tax: When a cost is generated for the company and an income for the employee, a tax effect is generated (deduction for the company and income tax for the worker).

    Social Security: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

    (iv) on the acquisition, holding and/or disposal of any underlying shares of securities;

    Tax: Since they are deemed to be income, they will be subject to income tax, but not VAT.

    Social Security: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

    (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

    Tax: The employee can deduct interest expenses when receiving a loan.

    Social Security: No impact.

  8. What are the tax and social security consequences for companies operating an incentive plan?

    (i) on grant;

    TAX: When a cost is generated for the company and an income for the employee, a tax effect is generated (deduction for the company and income tax for the worker).

    SOCIAL SECURITY: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

    (ii) on vesting;

    TAX: When a cost is generated for the company and an income for the employee, a tax effect is generated (deduction for the company and income tax for the worker).

    SOCIAL SECURITY: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

    (iii) on exercise;

    TAX: When a cost is generated for the company and an income for the employee, a tax effect is generated (deduction for the company and income tax for the worker).

    SOCIAL SECURITY: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

    (iv) on the acquisition, holding and/or disposal of any underlying shares of securities;

    TAX: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

    SOCIAL SECURITY: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

    (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

    TAX: When companies charge interest on employee loans, such interest must be reported as income.

    SOCIAL SECURITY: No impact.

  9. What are the reporting/notification/filing requirements applicable to an incentive plan?

    There are no official proceedings or requirements. Incentive plans must be mutually agreed by employer and employee or be part of a company’s internal policies.

  10. Do participants in incentive plans have a right to compensation for loss of their awards when their employment terminates? Does the reason for the termination matter?

    Because incentive plans are not regulated in Ecuador, the conditions for granting or eliminating them can be established by the company or agreed on by the parties. According to Ecuadorian jurisdiction, however, cash payments made regularly to workers could be presumed to be a permanent employment benefit; for example, if an employee receives a bonus in the same amount for several successive months, then in the case of any dismissal dispute, the authorities would take the worker’s salary, plus payment of cash-based incentives made on a regular basis, into account when calculating severance pay.

  11. Do any data protection requirements apply to the operation of an incentive plan?

    The Ecuadorian Constitution foresees data protection in general terms. Currently, different bills related to specific data protection regulation are under discussion in the Congress. Companies should treat personal data on a confidential basis.

  12. Are there any corporate governance guidelines that apply to the operation of incentive plans?

    Corporate governance guidelines have not been established as a standard in local legislation or corporate local practices. Therefore, any incentive plan beyond those legally or contractually established will apply based on the internal policies of each company.

  13. Are there any prospectus or securities law requirements that apply to the operation of incentive plans?

    The Ecuadorian Securities Market Law includes no specific requirements applicable to the operation of incentive plans with regards to employment relationships.

  14. Do any specialist regulatory regimes apply to incentive plans?

    There are no specialist regulatory regimes in Ecuador that apply to incentive plans.

  15. Are there any exchange control restrictions that affect the operation of incentive plans?

    The only controls are those concerning tax matters.

  16. What is the formal process for granting awards under an incentive plan?

    The formal process for granting incentives is agreed directly between the company and the employee. The law does not impose a mandatory or formal process.

  17. Can an overseas corporation operate an incentive plan?

    In Ecuador, overseas corporations have the same rights and obligations as local companies. Therefore, incentive plans are possible but not regulated by the law. The Labor Code already contains a series of benefits and protections favoring workers.

  18. Can an overseas employee participate in an incentive plan?

    Yes, overseas employees can participate in an incentive plan.

  19. How are share options or awards held by an internationally mobile employee taxed?

    This will depend on the tax domicile of the employee. If an employee’s domicile is Ecuador, the employee must file tax declarations, making the deductions permitted by local law.

    Notwithstanding the foregoing, any applicable double taxation treaty would have to analyzed. This depends on the existing agreements between the tax domicile and the current residence.

  20. How are cash-based incentives held by an internationally mobile employee taxed?

    This will depend on the tax domicile of the employee. If an employee’s domicile is Ecuador, the employee must file tax declarations, making the deductions permitted by local law.

    Notwithstanding the foregoing, any applicable double taxation treaty would have to analyzed. This depends on the existing agreements between the tax domicile and the current residence.

    Payments abroad generate the foreign exchange tax.

  21. What trends in incentive plan design have you observed over the last 12 months?

    The incentives to workers in Ecuador are relatively static because severe and expensive obligations are covered by the Labor Code and other related standards. Additional incentive plans can be proposed by the company or agreed upon by mutual agreement.

    Non-cash-based incentives are common as working shorter hours a specific day of the week, home office and flexible labor schemes (local labor requirements might be met).

  22. What are the current developments and proposals for reform that will affect the operation of incentive plans over the next 12 months?

    Currently, there are several debates regarding the amendment of labor legislation. Since it is a particularly protective Labor Code favoring workers, the reforms ascribe greater flexibility for hiring workers.

    As far as incentive plans are concerned, however, they are agreed by the parties. Therefore, in principle, there is no reform in the pipeline that could affect the operation of incentive plans.